Banks Get Fed's Nod to Pay Dividends

By

Dan Fitzpatrick

Updated March 19, 2011 12:01 a.m. ET

Six of the nation's largest banks are about to line shareholders' pockets with $8.7 billion in new dividend payments this year.

Minutes after the Federal Reserve privately notified some financial institutions that they passed a new round of regulatory "stress tests," a half-dozen sent out a flurry of statements Friday detailing the new payouts. Three more banks said they may raise dividends without specifying the amounts, likely providing another $3.4 billion for shareholders this year, according to research firms SNL Financial LC and RBC Capital Markets LLC.

The day was a watershed moment for the U.S. banking industry. In giving the nod to banks, regulators freed them from strict oversight for the first time since the 2008 financial crisis. At the time, the government forced banks to cut dividends and use the money instead to shore up their financial condition.

Potential 2011 dividends of more than $12 billion, paid by just 10 banks, would dwarf the $4.5 billion in profits the entire industry posted in 2008.

The Fed's move Friday to allow some banks to resume higher shareholder payouts also presented a clear division between the industry's strongest and weakest players. J.P. Morgan Chase & Co., Wells Fargo & Co., BB&T Corp., U.S. Bancorp and PNC Financial Services Group Inc. were among the first to announce a planned restoration of dividends. Many of the same banks said they also intend to buy back shares, which likely would boost the value of their stock.

ENLARGE

The Fed's approval gave healthy banks the freedom to deploy their capital in other ways, including repaying creditors. Regional banks SunTrust Banks Inc. and KeyCorp received approval to repay more than $7 billion in combined U.S. aid.

Goldman Sachs Group Inc. said it now can redeem a $5 billion investment from Warren Buffett'sBerkshire Hathaway Inc. The infusion was critical for Goldman at the height of the financial crisis, but it was costly. Goldman had been paying Berkshire interest of $1.3 million a day, or $15 a second.

The Fed, though, isn't letting go of all control. It will continue to require banks to notify regulators of any planned dividends and share repurchases over a 24-month period. Banks will be able to make their own decisions, but regulators still can slap institutions with enforcement actions if they determine that banks aren't using capital wisely.

The Fed was cautious Friday in what it allowed even the healthiest banks to do. The restoration of dividends won't return to precrisis levels, with the Fed limiting the payouts to 30% or less of anticipated earnings. J.P. Morgan Chase intends to pay out 20% of its earnings, raising its quarterly dividend to 25 cents a share, up from five cents. That is short of the 38 cents a share the company paid as late as 2009.

The first round of U.S. stress tests were introduced in early 2009 to determine how much of a cushion would be needed if a sluggish economy deteriorated. Those tests showed the 19 banks faced a total of $599 billion in losses over two years under the government's worst-case, Depression-like scenario.

The Fed directed 10 banks to add a total of nearly $75 billion to capital buffers to insulate themselves from potential losses.

In this second test, the Fed asked the banks to show regulators whether plans to unleash capital could withstand an 11% unemployment level, a 1.5% drop in the real gross domestic product, a 6.2% drop in an index of home prices and a 27.8% drop in equity prices.

The new test "wasn't wimpy," said Gerard Cassidy, an analyst with RBC Capital Markets. He said the Fed's metrics show that regulators still are concerned about the banks but also may be worried that restrictions could hamper their recovery. So, citing the relatively mild drop in GDP, for example, he said the test "wasn't extremely difficult either."

But it also was clear Friday that even as some banks lag behind rivals, the Fed allowed them to claim some sort of victory as a result of the test.

Regions Financial Corp., the only large regional bank that still hasn't announced plans to repay its government aid, put out a statement Friday saying that it didn't ask the Fed for approval to repay its federal aid or raise dividends.

"The company's position of repaying the government's [Troubled Asset Relief Program] investment in a prudent manner, on shareholder-friendly terms, remains unchanged," it said.

Capital One Financial Corp. said it wouldn't raise its dividend during the first quarter of 2011 and noted that "the company continues to believe that its capital and expected capital trajectory are strong."

The industry's two largest banks, Citigroup Inc. and Bank of America Corp., said they don't plan to apply for dividend increases until later.

Bank of America said its proposal for a "modest" dividend increase in the second half of 2011 will happen this summer. Citigroup said in a statement that it expects to "be in a position to return capital to its shareholders in 2012."

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